Why Tencent is Helping Alibaba IPO — and Even Yahoo!

As if Chinese Internet giant Alibaba needed more punch, earnings from Hong Kong-listed rival Tencent Holdings Ltd. are likely to provide even more lift to Alibaba’s upcoming initial public offering (IPO). Added to that is an agreement Alibaba reached on Tuesday that removes a $6 billion cap on Alibaba’s share of the proceeds from an IPO or sale of the company that controls Alipay, Alibaba’s online payment service.

Alibaba’s IPO was pushed out to some time after Labor Day so that all the vacationing investment bankers would be back at their desks for the big day. The IPO could conceivably be the largest ever in the United States, and Alibaba seems determined not to leave a single dime on the table.

Two significant investors in Alibaba — Japan’s SoftBank Corp., which holds a stake of about 34%, and Yahoo! Inc. (NASDAQ: YHOO), which holds a stake of about 23% — no doubt hope that the Chinese company can gin up even more excitement and enthusiasm for the IPO by waiting.

When Yahoo reported earnings last month, the company said it had amended its share repurchase agreement with Alibaba. The new deal reduces the number of shares Yahoo is required to sell in Alibaba’s IPO from 208 million to 140 million. At the time, Yahoo’s CFO said, “We would like to take this opportunity to let our investors know that we are committed to return at least half of the after-tax IPO proceeds to shareholders …” Following the IPO, Yahoo’s stake in Alibaba will drop to around 16%.

How the Tencent earnings results fit into this enormous deal is not immediately obvious. In the first quarter of this year, Tencent reported that WeChat and QQ, the company’s two messaging programs claimed 396 million monthly active users in China. The number of monthly active users for Tencent’s instant messaging service was 848 million.

In Wednesday morning’s second-quarter results, Tencent said that the number of monthly active users (MAU) fell 2% sequentially to 829 million, but the combined total for WeChat and QQ rose to 438 million MAU, up 11% sequentially and up a whopping 57% year-over-year. Mobile device usage of QQ rose 6% sequentially and 45% year-over-year. Revenue growth from online games was up 7% year-over-year.

That’s the important thing for Alibaba: China’s Internet usage continues to post massive user growth. That’s what that supports the huge valuations for Tencent, and that’s what will keep the enthusiasm at a fever pitch for Alibaba.